Total cat bond issuance to reach or exceed $7bn in 2013 - GC Securities

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The influence of non-traditional capacity in the reinsurance industry has never been higher, according to GC Securities, which has released an analysis of first-quarter activity and trends within the catastrophe risk market for 2013.

Two natural peril-exposed catastrophe bond transactions closed during the first quarter of 2013, for a total of $520m of issuance. This seemingly low level of primary issuance activity is deceiving, however.

When looking to the remainder of 2013, GC Securities expects the market to approach, if not exceed, the record for annual issuance of $7bn set in 2007. This forecast depends on cat bond market pricing remaining stable and non-US peak peril sponsors taking advantage of particularly attractive conditions to bring sizeable issuances to the market during the balance of 2013.

“The catastrophe risk market is demonstrating its readiness to transition from ‘adolescence’ to ‘young adulthood,” said GC Securities global head of distribution for ILS Chi Hum.

“Spreads in the catastrophe market tightened significantly during the first quarter of the year, driven by strong demand from investors seeking additional deployment opportunities,” added GC Securities global head of ILS Structuring Cory Anger.

“Although the low interest rate environment has made the catastrophe market more attractive to institutional capital, it is not the primary driver of inflows. Rather, we are seeing significant demands in part because of the ‘decoupling’ of pricing between the traditional reinsurance and capital markets. While traditional reinsurance has capital constraints for peak risk zones, such as Florida, the cat bond market may be able to offer capacity at a lower price point because it does not have the same capital costs.”

Total risk capital outstanding increased during the first quarter of 2013, reaching an all-time high water mark of $15bn. This marks the eighth consecutive quarter of growth in risk capital outstanding, up more than 17% since the end of the first quarter of 2012.

As detailed in the report, there has been a continued and demonstrated broadening of investor interest in the catastrophe risk market, as seen in early 2013. Smaller and mid-size ILS managers are beginning to “score points”, generating new mandates from institutional asset managers, primarily pensions.

“We are seeing that conservative institutional asset managers have largely accepted catastrophe risk as a component of a mainstream investment strategy,” said Hum. “The broadening investor base is certainly a positive trend for the long term, as it increases the level of available capacity without leaving the market susceptible to reckless capital. Looking forward to the balance of 2013, capacity from the alternative markets has never been more competitive.”